Capital Mobility Versus Sterilization Policy: A Time Series Approach for Austria
Posted: 26 Jun 2011
Date Written: 1985
Abstract
In this paper the causal relationship between the domestic and the foreign components of the Austrian monetary base has been investigated. The two components seem closely and negatively related which induced the formulation of two hypotheses: the "capital mobility hypothesis" implying that the direction of causation predominantly runs from the domestic to the foreign component; and the "sterilization hypothesis" according to which changes in the domestic component are caused by exogenous changes in the foreign component. These two hypotheses were related, respectively, to the monetarist and portfolio approaches of balance of payments theory. Granger-causality tests were applied to monthly as well as to weekly data. The empirical results indicate that the sterilization hypothesis dominates over the capital mobility hypothesis. A possible explanation is that certain government agencies were permitted to import capital from abroad according to their specific requirements regardless of monetary policy considerations. Therefore, the central bank has at times sterilized these capital imports before equilibrating market forces would work their way through the economy.
Keywords: Capital mobility, sterlization, Granger causality, Austria
JEL Classification: E52, F30
Suggested Citation: Suggested Citation